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Sunday, February 5, 2017

In Search of the Elusive Victims of Globlization

The 2016 US Presidential election has placed trade policy high on the
national agenda. Both Bernie Sanders, on the left, and Donald Trump, on
the right, campaigned on overtly protectionist platforms. Now that
Trump is in office, he has begun implementing his program of “buy
American, hire American.”

In response, many members of the
economics profession, always a bastion of free-trade sentiment, have
taken a new look at something they always knew but did not always like
to talk about: the fact that trade creates winners and losers. In a
widely cited paper, “The China Shock,”
David Autor and colleagues show that the losses from trade shocks to
the US economy are larger and more persistent than many had thought.
Such research makes it understandable how politicians can assemble
victims of trade shocks into winning coalitions.

Although Trump
and Sanders have directed most of their critique of global trade at the
way it creates losers in the US economy, other critics are more
concerned with the effects on US trade partners. Taking advantage of the
media attention drawn by their sometimes disorderly protests against
the Seattle meetings of the World Trade Organization in 1999, these
critics emphasize that trade creates victims in poor countries as well
as rich.

In an entry, “Defining the Anti-Globalization Movement,” in the Encyclopedia of Activism and Social Justice,
Mark Engler points out that there is no unified movement that fits that
term. Instead, there is an informal coalition of trade unionists,
environmentalists, indigenous rights activists, organizations promoting
sustainable development, and anti-sweatshop campaigners. Many of these
groups spurn the “anti-globalist” label, preferring terms like “global
justice movement” or even (standing the term on its head) the
“globalization movement.”

What unites these groups, Engler says,
is the belief that the corporate-led globalization of the past quarter
century has exacerbated global poverty and increased inequality. Many of
them frame their mission as one of opposition to neoliberalism, by
which they mean policies including privatization of public industries,
opening markets to foreign investment and competition, removing controls
on capital flows, reducing tariffs and other trade barriers, and ending
government protections for local industry. Movement participants,
Engler says, “argue that these policies have created sweatshop working
conditions in the developing world, threatened unionized jobs and
environmental protections in the global North, benefited the wealthy at
the expense of the poor, and endangered indigenous cultures.”

At the risk of oversimplification, I think there is a unifying theme here, which I will call the globalization hypothesis :
The proposition that free trade (or neoliberalism, if you prefer) has
enriched elites at the expense of the vulnerable in both the developed
and the developing world.

The search for evidence

At
the same time trade issues were making their way regularly into the
headlines, I was working on an unrelated project using some large data
sets that were rich in global economic, social, and political
indicators. It occurred to me that it might be possible to get some
insight into the validity of the globalization hypothesis by looking for
critical differences in these indicators between countries that were
more open to trade and those that were less open.

One of the data sets is the Economic Freedom Index
from the Fraser Institute. It includes a component, Freedom to Trade
Internationally, that seems to capture important parts of the neoliberal
agenda, as described by critics like Engler. Fraser’s trade freedom score,
as I will call it, is calculated on a scale of zero (least free) to ten
(most free), based on indicators for tariffs, regulatory trade
barriers, compliance costs for importing and exporting, black market
exchange rates, controls of the movement of capital and people,
restrictions on foreign ownership and foreign investment, capital
controls, and freedom of travel.

The other data set I will use here is the Legatum Prosperity Index .
Its creator, the Legatum Institute, is more sympathetic to the global
justice perspective, in that it views prosperity as the creation of a
better life for individual people rather than as just the accumulation
of material wealth. The Legatum index organizes the data into distinct
economic and noneconomic components, or “pillars”: Economic quality
(macroeconomic indicators, and financial institutions); business
environment; governance (political participation, transparency, and rule
of law); education; health; safety and security (both national security
and personal safety); personal freedom (human rights, legal rights, and
tolerance); social capital (personal relationships, social network
support, civic participation); and natural environment.

The Fraser
Institute’s data set covers 159 countries while that from the Legatum
Institute covers 149. Both indexes are available for an overlapping set
of 144 countries.

Findings

First, let’s
check to see if these data support the proposition that free trade is
associated with strong macroeconomic performance and a good business
environment. Neoliberals certainly think that it does, and I think many
global justice advocates do not dispute it at the macro level. Here is a
scatter plot of the Fraser trade freedom scores against the Legatum
economy and business environment scores:

As
expected, there is a solid positive relationship in both cases. The
correlation coefficient for the economy is 0.63 and for the business
environment 0.71, where a coefficient of 1.0 would indicate a perfect
fit. Both coefficients are statistically significant at the 0.01 level.
No surprises here.

But what about the noneconomic effects of free
trade? That is where we might expect evidence relevant to the globalist
hypothesis to show up. To see if it does, I first calculated a “social
prosperity” score for each country, consisting of the combined scores,
scaled zero to 100, on the Legatum components for governance, education,
health, security, personal freedom, social capital, and environment.
Here is the result:

This
result is surprisingly similar to the chart for the economic and
business components: The correlation coefficient between social
prosperity and freedom to trade is 0.68, again positive and
statistically significant. That is also true for each of the individual
components of social prosperity. Putting correlations in parentheses, in
countries that are open to free trade, people tend to be
better-governed (0.67), better educated (0.61), healthier (0.60), more
secure (0.64), and freer (0.57). They also enjoy more social capital
(0.43) and a better natural environment (0.43).

There is still a
reason to be skeptical, however. Maybe what is really happening is that a
few wealthy, free-trading countries are pulling up the average on the
right side of the chart at the expense of their poorer third-world
trading partners. If that is the case, we would expect the relationship
between trade and social prosperity within the developing group to be
negative, or at least much weaker than within the entire sample.

We
can check that possibility by dividing the sample into two parts, one
for countries that are already wealthy and the other for the developing
world. The next chart does that. The blue diamonds represent the 35
members of the Organization for Cooperation and Development; the red
squares are the remaining 109 non-OECD countries.

The
correlation between trade freedom and social prosperity remains
positive (0.63) and statistically significant within the non-OECD group,
just as it is for the group as a whole. There are some outliers,
however.

At the extreme left of the chart, three countries, Iran,
Venezuela, and Argentina, are the least open to trade of any countries
in the world. All three lie above the trend line, indicating that they
have better-than-expected social prosperity scores. They are not exactly
poster-children for social prosperity — Iran and Venezuela are below
the world social prosperity median, and Argentina is only a little above
it — but they do suggest that at least a few countries have closed
themselves off to trade without suffering disastrous social
consequences. The data don’t give much of a clue as to what the three
might have in common, except that all of them have poor scores on
governance and somewhat better than expected scores on education.

Meanwhile,
at the extreme right, we find Singapore and Hong Kong, the two
countries that are most open to trade of all. Both of them also have
higher than expected social prosperity scores. Singapore ranks number
one in the world in safety and security and number two in health,
although personal freedom, where it ranks ninety-seventh, is clearly a
weak spot. Hong Kong has excellent scores for health, safety, and
education, but it ranks a smoggy ninety-eighth in terms of its natural
environment.

Interestingly, there is no significant correlation
between freedom to trade and social prosperity within the OECD. Perhaps
that should not come as a surprise, since the OECD is not a randomly
selected group. Countries are not invited to join unless they have open
economies, so there is not enough variation among members in that regard
to give statistically meaningful results.

What does distinguish
OECD countries even more than trade freedom is good governance — a
Legatum category that includes participation, transparency, democracy,
and rule of law. Eighteen of the twenty highest governance scores in the
world belong to OECD countries. (The only non-OECD countries in the
group are number 18, Singapore, and number 19, Uruguay.) Since good
governance correlates highly with other elements of social prosperity,
it is not surprising that the OECD countries lie in the upper-right-hand
corner of the chart.

The issue of equality

Even
when we split the sample into OECD and other countries, we have not
really come to grips with one of the central concerns of the global
justice movement. Its adherents would rightly point out that even if the
national averages for social prosperity indicators might look good for
countries that trade, the individual elements of prosperity, whether
health care, education, or personal security might still be unequally
distributed within each country. If so, then our charts, which
show only country averages, might mask a tendency for trade to benefit
elites within each country at the expense of the rest of society.

As
a starting point, we can look at the relationship between openness to
trade and equality of income distribution within countries, using data
from the UN Human Development Report. That report includes Gini indexes
of income inequality for 116 countries that overlap with the Fraser
trade freedom data. Gini indexes range from zero (completely equal
distribution) to 100 (maximum inequality). The most equal distribution
in the UN data set is Sweden, with an index of 25, followed closely by
Norway. The least equal is Namibia, at 63.9, with South Africa a close
second. The United States has the second-highest score in the OECD,
surpassed in inequality among that group only by Mexico. The US Gini
index of 40.8 is just above the global median of 39.9.

Across the
whole sample of countries, the correlation coefficient of the Gini index
with the trade freedom score is -0.31, not a tight fit but
statistically significant at a 0.01 level of confidence. Since the Gini
index increases as equality decreases, the negative correlation
coefficient means that the countries that are most open to trade tend to
have more equal income distributions. However, that correlation turns
out to be attributable entirely to the association between the two
variables within the OECD. The correlation coefficient within the
non-OECD group is -0.02, negative but not statistically different from
zero. There is, then, no evidence here to suggest that trade freedom is
associated either in one way or the other with pure inequality of income
distribution within our group of developing countries.

However,
it is the relationship between trade and inequality for the noneconomic
elements of social prosperity that really goes to the heart of the
globalization hypothesis. Anecdotally, we know that there are countries
where elites are well educated and live long lives while the poor are
illiterate and die young. Is there any evidence in our data set that
there is a general tendency for countries that are open to trade to fit
that pattern?

Unfortunately, we don’t have explicit data on the
within-country distribution of most of the social prosperity indicators.
What we do know, however, is that the people who put together the
Legatum index were aware of this issue and took steps to deal with it.
They did so by including indicators within each component of their index
that minimize the likelihood that countries with high degrees of social
inequality could achieve high scores. For example:

The
Legatum education component includes adult and youth literacy rate, a
Gini index for education equality, primary school completion rate,
secondary school enrollment, and the ratio of school enrollment for
girls and boys. Those indicators are weighted to account for about half
of the education score. As a result, education indicators that might be
skewed toward national elites, such as test scores and enrollment in top
universities, cannot by themselves give a top score to a country as a
whole.

The health component includes access to basic sanitation,
immunization rates, deaths from tuberculosis, and life expectancy at
birth. The presence of such indicators would pull down the score of any
country in which only elites live healthy lives.

The personal
safety and security component includes measures of malnutrition,
homelessness, deaths from civil and international conflicts, number of
refugees, and safety of walking at night. These indicators would
generate low scores in countries where only elites were safe and secure.

Other
components include similar indicators measuring items of social
prosperity that are by their nature beneficial to all, not just to
elites. That is true even of the components relating to economic quality
and business environment. You can find the full listing of indicators
for each component in an appendix to Legatum’s Methodology Report.

Conclusions

The
findings reported here do not constitute an actual refutation of the
globalization hypothesis, as we have formulated it — the proposition
that free trade systematically enriches elites at the expense of the
vulnerable in both the developed and the developing world. What they do
show is that once we move away from case studies and anecdotal evidence,
broad statistical evidence to support the hypothesis is hard to find.
On the contrary, if anything, there seems to be a significant tendency
for people to live healthier, more secure, and freer lives in countries
that are open to global trade than in those at similar levels of
development that are less open.

I doubt if that finding is really a
surprise to thoughtful supporters of the global justice movement. Even
in a country where trade brings gains in broad indicators of social
prosperity, such as infant mortality and girls’ literacy, there can be
individual losers, and the gains, even among the winners, may not be
distributed as widely as one might like. The real issue facing the
global justice movement is what to do about it.
The positive
association between trade and social prosperity at the national level
suggests that the proper response, in both wealthy and developing
countries, should take the form of policies that spread the gains of
trade widely and help individuals to adjust to change, rather than in
rolling back the process of globalization itself.

There
is no race to the bottom in which countries must abandon social
programs to keep up economically; in fact, social and economic goals can
be mutually supportive. Land reform, expansion of credit and services
for small producers, retraining and income support for displaced
workers, public-works programs for the unemployed, and provision of
basic education and health can enhance the productivity of workers and
farmers and thereby contribute to a country’s global competitiveness.
Such programs may require a rethinking of budget priorities in those
nations and a more accountable political and administrative framework,
but the obstacles are largely domestic.

Conversely, closing the
economy to international trade does not reduce the power of the relevant
vested interests: landlords, politicians and bureaucrats, and the rich
who enjoy government subsidies. Thus, globalization is not the main
cause of developing countries’ problems, contrary to the claim of
critics of globalization — just as globalization is often not the main
solution to these problems, contrary to the claim of overenthusiastic
free traders.

Our data support Bardham’s view,
inasmuch as the correlation of good governance with other indicators of
social prosperity is even stronger than that of openness to trade.
Ultimately, each country is responsible for its own governance, but
wealthy countries that trade with nations that are poor and badly
governed can support local efforts. They can insist that their own
companies not just comply with local labor and environment standards,
but aim higher than those local standards. They can insist that their
own nationals do not corruptly conspire with local economic and
political elites at the expense of the poor. And they can politely but
firmly resist the suggestion of any of their own citizens that the best
way to help people on lower rungs of the global economic ladder is to
refuse to buy anything from them.

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